China invests heavily in Brazil, elsewhere in pursuit of political heft

A Chinese delegation visits the Acu port in Sao Joao da Barra, Brazil. China is on track to become Brazil's No. 1 investor in 2010, with Chinese investment in Brazil topping $20 billion in the first half of this year. (Getty)

PORTO DO ACU, BRAZIL -- Here along the golden sands that grace the Atlantic coastline 175 miles north of Rio de Janeiro, China is forging a new economic reality.

Just past a port where workers are building a two-mile-long pier to accommodate huge vessels known as Chinamaxes that will transport iron ore for China's ravenous steel industry, past berths for tankers to lug oil to Beijing, a city of factories is sprouting on an island almost twice the size of Manhattan. Many of the structures will be built with Chinese investment: a steel mill, a shipyard, an automobile plant, a factory to manufacture oil and gas equipment.

The port project recalls the China of the past decade: a worldwide effort to extract resources for use in the country's vast manufacturing sector. But the factory city represents something new: an aggressive push to invest in industries overseas to bolster the country's image and political influence.

Call it "dollar diplomacy," Chinese-style.

The investments in Brazil reflect China's "going out" strategy, which seeks to guarantee natural resources for development purposes and to shield the country's state-owned enterprises from slower growth at home. Flush with more than $2 trillion in foreign exchange reserves, China has directed its state firms to scour the globe for opportunities.

As it does so, China is playing by its own rules, giving its firms an edge over U.S. and other multinational companies bound by internationally mandated restrictions intended to promote fair competition. In addition, Brazil and other developing countries, which once saw China as an ally, are now realizing that Chinese companies are competing on their own turf for resources and market share. And some analysts say the United States has been slow to perceive that China is using investment to build political heft.

In the first half of this year, China's investment in Brazil topped $20 billion, more than 10 times all of China's previous investment in the country. That puts China on track to be Brazil's No. 1 investor for 2010, compared with 29th in 2009. China's investments are also booming elsewhere -- from Peru, where one-third of the minerals sector is in Chinese hands, to Japan, where Chinese mergers and acquisitions quadrupled from 2008 to 2009.

"They do not want to be perceived as just natural-resource eaters," said Eike Batista, the Brazilian billionaire behind the port project and one of the world's richest men. "To them, it's common sense."

Li Jianqiang, who runs China Shipping's operations in South America, sees big opportunities. "Brazil used to look to the U.S. and Europe, but then one day they discovered us and they realized how far behind they were. Money talks, and we understand that. If you have money, people respect you, and then you will have political power."

Chinese firms have bought stakes in Brazil's electrical grid; they are building steel mills, car plants and a telecommunications infrastructure in that country. Chinese grain companies are negotiating to buy huge tracts -- some larger than 600,000 acres -- of Brazilian outback to plant soybeans. Chinese firms have the inside track on landing a huge high-speed-rail contract. They want to help realize Brazil's gargantuan plans -- estimated at more than $250 billion -- to tap its offshore oil reserves.

The China Development Bank has given Petrobras, Brazil's main oil producer, $10 billion as a down payment on future business. Starting last year, China became Brazil's biggest trading partner, replacing the United States.

China has even begun to adopt a gringo swagger that stands in contrast to its old role as the cheerleader for the Third World. For the past several months, it has refused to buy a drop of soy oil from Argentina after that country slapped tariffs on Chinese shoes -- although that tiff didn't stop Beijing from committing $8.5 billion this month to refurbish Argentina's creaky rail system as long as Argentina buys Chinese trains.